So far this year, gold is dramatically outshining other metals. It may be bad news for the economy.
It is no secret that gold, traditionally a haven asset, has been on a tear, with prices up 40% in the past year, thanks to buying by central banks and a chaotic U.S. political scene. On Friday, gold traded at $3313 an ounce, down 0.9%, and about 3% below its April record.
It has been a far different story for industrial metals such as copper, aluminum, and zinc. Their prices, driven by prospects for global economic growth, are down 10%, on average, in the past 12 months.
That divergence in prices is ominous, according to a note Friday from Mike McGlone, a senior commodity strategist at Bloomberg Intelligence. “The highest-ever gold price vs. the Bloomberg Industrial Metals Spot Subindex at the end of May, based on our database going back to 1991, isn’t a good sign for the global economy,” he wrote.
There are some caveats, according to McGlone. U.S. stock prices remain high, and yields on Treasury bonds have been rising recently, not falling, as one would expect if nervous investors were dumping risky assets and buying the debt in a flight to safety.
What is more, gold prices have been climbing steadily for several years, thanks to worries about inflation and buying by foreign central banks, which have been gradually diversifying their reserve assets away from the U.S. dollar. U.S. retail investors have been getting into the action too, snapping up gold bars at Costco, often as soon as they hit the shelves.
By this reckoning, gold’s price surge relative to more economically sensitive metals isn’t necessarily a flashing red light for the economy. Instead, it merely suggests gold is in a bubble.
That is certainly the view of plenty on Wall Street. Last month, a Bank of America Securities survey of global fund managers found 49% named gold the market’s “most crowded trade.” The Magnificent Seven had held that honor for the previous two years.
Still, writing off gold’s price moves simply because the metal is making headlines and investors are piling in could be a mistake. After all, while gold prices are hovering near record highs, so is the S&P 500, with price-to-earnings ratios higher than at any time since the late 1990s.
If U.S. stock prices were to tumble, perhaps in response to slowing U.S. economic growth or political turmoil, it could easily trigger a global selloff. That could see investors fleeing risky assets, including not just stocks, but Bitcoin and economically sensitive metals like copper.
At least some of the money flooding out of these volatile assets would likely find shelter in gold, driving prices to new highs.
“Unprecedented U.S. tariffs are coming with the stock market historically elevated, which may test the inordinate burden on the S&P 500 to remain elevated to buoy all boats,” he wrote.
Write to Ian Salisbury at ian.salisbury@barrons.com
